The document discusses long-run economic growth and business cycles. It explains that long-run growth is driven by increases in productivity and technology, while business cycles represent alternating periods of economic expansion and recession. It also explores how financial systems and capital markets facilitate long-run growth by channeling savings to investment.

2. Growth and the Business Cycle at Boeing Learning Objectives In this chapter, we will provide an overview of long-run growth and the business cycle and discuss their importance for individual firms, for consumers, and for the economy as a whole. Explain what happens during a business cycle . 9.3 Discuss the role of the financial system in facilitating long-run economic growth . 9.2 Discuss the importance of long-run economic growth . 9.1

3. Economic Growth, the Financial System, and Business Cycles Business cycle Alternating periods of economic expansion and economic recession.

4. Long-Run Economic Growth Learning Objective 9.1 Long-run economic growth The process by which rising productivity increases the average standard of living. FIGURE 9.1 The Growth in Real GDP per Capita, 1900–2006

5. The Connection between Economic Prosperity and Health Learning Objective 9.1 Making the Connection

6. Long-Run Economic Growth Learning Objective 9.1 Calculating Growth Rates and the Rule of 70 What Determines the Rate of Long-Run Growth? Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work.

7. Long-Run Economic Growth Learning Objective 9.1 What Determines the Rate of Long-Run Growth? Capital Manufactured goods that are used to produce other goods and services. Increases in Capital per Hour Worked Technological Change Economic growth depends more on technological change than on increases in capital per hour worked. Technological change is an increase in the quantity of output firms can produce using a given quantity of inputs.

8. The Role of Technological Change in Growth Learning Objective 9.1 Between 1960 and 1995, real GDP per capita in Singapore grew at an average annual rate of 6.2 percent. This very rapid growth rate results in the level of real GDP per capita doubling about every 11.5 years. In 1995, Alywn Young of the University of Chicago published an article in which he argued that Singapore’s growth depended more on increases in capital per hour worked, increases in the labor force participation rate, and the transfer of workers from agricultural to nonagricultural jobs than on technological change. If Young’s analysis was correct, predict what was likely to happen to Singapore’s growth rate in the years after 1995. Solved Problem 9-1

9. What Explains Rapid Economic Growth in Botswana? Learning Objective 9.1 Making the Connection

10. Long-Run Economic Growth Learning Objective 9.1 Potential Real GDP Potential GDP The level of GDP attained when all firms are producing at capacity.

11. Long-Run Economic Growth Learning Objective 9.1 Potential Real GDP FIGURE 9.2 Actual and Potential Real GDP

12. Saving, Investment, and the Financial System Learning Objective 9.2 An Overview of the Financial System Financial markets Markets where financial securities, such as stocks and bonds, are bought and sold. Financial intermediaries Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers. Financial system The system of financial markets and financial intermediaries through which firms acquire funds from households.

13. Saving, Investment, and the Financial System Learning Objective 9.2 The Macroeconomics of Saving and Investment Y = C + I + G + NX Y = C + I + G I = Y − C − G = Y + TR − C − T = T − G − TR

14. Saving, Investment, and the Financial System Learning Objective 9.2 S = (Y + TR − C − T) + (T − G − TR) S = Y − C − G S = I or or So, we can conclude that total saving must equal total investment: The Macroeconomics of Saving and Investment S = +

15. Saving, Investment, and the Financial System Learning Objective 9.2 The Market for Loanable Funds Market for loanable funds The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.

16. Saving, Investment, and the Financial System Learning Objective 9.2 Demand and Supply in the Loanable Funds Market FIGURE 9.3 The Market for Loanable Funds The Market for Loanable Funds

17. Ebenezer Scrooge: Accidental Promoter of Economic Growth? Learning Objective 9.2 Who was better for economic growth: Scrooge the saver or Scrooge the spender? Making the Connection

18. Saving, Investment, and the Financial System Learning Objective 9.2 Explaining Movements in Saving, Investment, and Interest Rates FIGURE 9.4 An Increase in the Demand for Loanable Funds The Market for Loanable Funds

19. Saving, Investment, and the Financial System Learning Objective 9.2 Crowding out A decline in private expenditures as a result of an increase in government purchases. Explaining Movements in Saving, Investment, and Interest Rates The Market for Loanable Funds

20. Saving, Investment, and the Financial System Learning Objective 9.2 Explaining Movements in Saving, Investment, and Interest Rates FIGURE 9.5 The Effect of a Budget Deficit on the Market for Loanable Funds The Market for Loanable Funds

21. How Would a Consumption Tax Affect Saving, Investment, the Interest Rate, and Economic Growth? Learning Objective 9.2 Solved Problem 9-2

22. The Business Cycle Learning Objective 9.3 FIGURE 9.6 The Business Cycle Some Basic Business Cycle Definitions

23. Who Decides if the Economy Is in a Recession? Learning Objective 9.3 Making the Connection 16 months March 1975 November 1973 8 months March 1991 July 1990 16 months November 1982 July 1981 8 months November 2001 March 2001 6 months July 1980 January 1980 11 months November 1970 December 1969 10 months February 1961 April 1960 8 months April 1958 August 1957 10 months May 1954 July 1953 LENGTH OF RECESSION TROUGH PEAK

24. The Business Cycle Learning Objective 9.3 FIGURE 9.7 The Effect of the Business Cycle on Boeing What Happens during a Business Cycle? The Effect of the Business Cycle on Boeing

25. The Business Cycle Learning Objective 9.3 FIGURE 9.8 The Effect of the 2001 Recession on the Inflation Rate The Effect of the Business Cycle on the Inflation Rate What Happens during a Business Cycle?

26. The Business Cycle Learning Objective 9.3 FIGURE 9.9 The Impact of Recessions on the Inflation Rate The Effect of the Business Cycle on the Inflation Rate Don’t Let This Happen to YOU! Don’t Confuse the Price Level and the Inflation Rate What Happens during a Business Cycle?

27. The Business Cycle Learning Objective 9.3 FIGURE 9.10 How the Recession of 2001 Affected the Unemployment Rate The Effect of the Business Cycle on the Unemployment Rate What Happens during a Business Cycle?

28. The Business Cycle Learning Objective 9.3 FIGURE 9.11 The Impact of Recessions on the Unemployment Rate The Effect of the Business Cycle on the Unemployment Rate What Happens during a Business Cycle?

29. The Business Cycle Learning Objective 9.3 FIGURE 9.12 Fluctuations in Real GDP, 1900–2006 Recessions Have Been Milder and the Economy Has Been More Stable Since 1950 What Happens during a Business Cycle?

30. The Business Cycle Learning Objective 9.3 Recessions Have Been Milder and the Economy Has Been More Stable Since 1950 Table 9-1 The Business Cycle Has Become Milder What Happens during a Business Cycle? 9 months 61 months 1950-2001 19 months 25 months 1900-1950 26 months 26 months 1870-1900 AVERAGE LENGTH OF RECESSIONS AVERAGE LENGTH OF EXPANSIONS PERIOD

31. The Business Cycle Learning Objective 9.3 • The increasing importance of services and the declining importance of goods. • The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed. • Active federal government policies to stabilize the economy. Why Is the Economy More Stable?

32. An Inside LOOK China’s Airlines Are Failing to Translate Rapid Growth into Profits Chinese Aviation: On a Wing and a Prayer

33. An Inside LOOK China’s Airlines Are Failing to Translate Rapid Growth into Profits Chinese Aviation: On a Wing and a Prayer (continued)

34. Business cycle Capital Crowding out Financial intermediaries Financial markets Financial system Labor productivity Long-run economic growth Market for loanable funds Potential GDP K e y T e r m s